Thursday, May 24, 2012

Second Job & Debt Snowballing

I'm looking in to picking up a second job.  It's nothing super impressive- actually it would be working 1 hour, 1 day a week. It would pay $20-$25 per day though, which is an extra $80-$100 a month.

Not setting the world on fire, but not bad for working a grand total of 4 hours each month either.

My plan, if I get this job, is to set aside 1/4 for taxes.  We have to pay taxes anyway (we withhold ourselves because of some crappy tax laws), so I might as well go above and beyond to cover and surprises.

That leaves, let's say, $60 left.  Now, I could do something fun with it.  Lord knows, I'm fighting the desire to use that money to buy fun things- dinners out, movies, buying new rabbit cages/equipment or just going nuts in stores.

Instead, I'm planning on using that money to pay on a bill each month.  The same bill- the goal would be to have $60 extra go directly to principal.  I am thinking right now it would be best to put it on our oldest car- we're so close to paying it off anyway, we'd free up a few hundred dollars extra as soon as that bill is gone!

Then I can work on doing a "debt snowball".  Basically, I'd take my extra $60 and combine it with what we are spending on the car payment to pay down another debt even faster. Then I take that money and use it to pay off something else even faster.  See how that works? The amount you pay to principal snowballs each time you pay off a new debt.

For instance (all numbers are made up to use as illustrations).

Let's say we that monthly we have a $500 car payment, a $500 house payment and a $100 credit card payment.  You can either pay off the lowest balance first, or the highest interest rate, whichever is your preference.

So I use my $60 a month to pay to principal and eventually pay off my credit card debt.  The next month I pay $160 extra towards my car payment.  We pay off the car after a year or two and then we pay an extra $660 each month on the house payment!  You're paying more to principal each month than your minimum balance is! So a 30 year loan just dropped to 15 years and you saved untold thousands of dollars in interest, not just on your car and credit card, but on your house as well.

So, fingers crossed for me.  $60 extra isn't a lot, but it's just the beginning!


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